For the purpose of Article 5(3) of Commission Delegated Regulation (EU) 2015/63 the valuation of derivative contracts should be done in accordance with the methodology specified in Article 429(6) and (7) of Regulation (EU) No 575/2013 (CRR) [as amended by Commission Delegated Regulation (EU) 2015/62].

How should this methodology be applied when adjusting the liability side, i.e. derivative contracts with a negative market value?

Background on the question:

The answer to Q&A 2017_3172 explains the CRR methodology from a market risk point of view and for the purposes of the leverage ratio.

The application of this methodology for the purpose of Article 5(3) of Commission Delegated Regulation (EU) 2015/63 should be understood in the context of the specific framework for the calculation of contributions to resolution financing arrangements. In accordance with Article 103(2) of Directive 2014/59/EU, contributions to resolution financing arrangements should be pro rata to the amount of liabilities. Derivative liabilities are therefore to enter such calculation.

Recital 12 of Commission Delegated Regulation (EU) 2015/63 explains that the leverage ratio methodology is extrapolated from its context and applied to that Regulation for a different purpose than it was conceived for, i.e. in order to ensure a harmonised treatment of derivatives in the calculation of contributions. In light of such different purpose, this Q&A clarifies the specificities of the application of the leverage ratio methodology to the case of Article 5(3) of Commission Delegated Regulation (EU) 2015/63.

Date of submission:

03/10/2017

Published as Final Q&A:

15/12/2017

EBA answer:

The following derivative contracts shall enter into the calculation of the basic annual contributions as specified in Article 5(4) of Commission Delegated Regulation (EU) 2015/63:

- Derivative contracts included in a netting agreement recognised in accordance with Article 295 of Regulation (EU) No 575/2013 (CRR) where the current market value of the netting set is negative;

- Derivative contracts not included in a netting agreement or included in a netting agreement not recognised in accordance with Article 295 of Regulation (EU) No 575/2013 (CRR) where the current market value of the individual derivative contracts is negative.

For the purpose of calculating the value assigned to liabilities arising from derivative contracts in accordance with Article 5(3) of Commission Delegated Regulation (EU) 2015/63 as amended by Commission Delegated Regulation (EU) 2016/1434, institutions shall apply the methodology set out in Article 429a of Regulation (EU) 575/2013 (CRR) as amended by Commission Delegated Regulation (EU) 2015/62, as appropriate. In applying the methodology set out in Article 429a, institutions shall, in the calculation of the replacement cost of the exposure value, replace the current market value of the netting set of derivative contracts or the current market value individual derivative contracts, as applicable, by the absolute value of the current market value of the netting set of derivative contracts or the current market value individual derivative contracts, respectively.

Disclaimer:

This question goes beyond matters of consistent and effective application of the regulatory framework. A Directorate General of the Commission (Directorate General Financial Stability, Financial Services and Capital Markets Union) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which the European Banking Authority publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.